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October 2, 2008

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BUSINESS OWNERS WITH bad credit, unproven track records or exposure to troubled industries, such as housing and construction, have already felt the vise-like squeeze of the credit crunch. But now, as Wall Street further unravels and banks fold or get acquired on an almost-daily basis, the prospect of landing a loan or line of credit — or maintaining one — seems downright bleak to even the most creditworthy business owners.

Seeking to rein in once-risky lending practices, banks are keeping more cash in their coffers. According to the Federal Reserve’s most recent Senior Loan Officer Opinion Survey, at the end of July, 65% of domestic banks said they tightened credit for small firms — up from 50% in the Fed's April survey.

Statistics like this, as well as the continuing meltdown among the banks, undoubtedly raise concerns among small-business owners about their ability to continue financing their operations. Here's how to make sure your business's cash flow doesn't dry up:

Assess Your Risk Level

Banks can simply stop lending if they want to, says Wayne Miller, deputy senior credit officer, at Sterling National Bank in New York. While lenders typically won’t cancel a line of credit or turn away prime borrowers whose businesses are sound — that is, a business with its records in order, paying customers and a history of paying debts on time — “if [banks] wanted to get out of the business [or reduce your credit line], they could,” says Miller.

Especially at risk are businesses where the financial situation is deteriorating, notes Frank Griffin, chief lending officer at Flint Community Bank in Albany, Ga. A business owner who is late on a couple of loan payments, or who is using collateral that has depreciated in value could easily find themselves in the bank's sights.

To prevent a bank from cutting you off, you need to lower your risk level, says Griffin. Get your business back in financial shape by reining in overdue payments and trimming excess expenses. Or simply pay down a loan, he adds. Gregg S. Fisher, president and chief investment officer at New York financial advisory firm Gerstein Fisher, suggests putting up some added collateral. For instance, if a loan was simply backed by a business's receivables before, throw in the commercial piece of real estate you own. Business owners can also secure credit lines with personal assets such as a home, adds Fisher. Just remember, it's a risky bet: If you don't make good on your obligations, you could end up homeless.

Know Your Rights

Read your loan agreement thoroughly, advises Charles L. Failla, a financial planner at Sovereign Financial Group in New York. Find out if your bank has the authority to cut your credit line and under what conditions this can occur. Also, check to see if your loan is “callable” — that is, the bank has the right to make you pay back a loan in a quicker period of time.

For help with the fine print, contact your attorney. Or, talk with your banker, suggests Dennis J. Ceru, small-business advisor and entrepreneurship professor at Babson College in Wellesley, Mass. Ask questions regarding current bank policies. Or, if any new policies may be lurking. Also, if your business isn’t in the best shape, Ceru says it's best to be forthcoming with that information. The bank may give you some leeway on payment terms so you can improve your business's financial health, he says. Or, if the bank does intend to call in your loan, it’ll typically provide new terms that allow for more time to repay the debt.

Check Your Bank's Health

With so many banks declaring devastating losses, it's a good idea to evaluate your bank's financial footing. Take a look at its financial documents such as 10-Ks, annual reports, balance sheets and income statements. See if the bank has exposure to risky residential and commercial mortgages, in particular "Alt-A" loans, which are typically reserved for the riskiest borrowers. Also, check whether the bank has holdings abroad. If it relies too heavily on U.S.-based assets, a further weakening in the U.S. economy could deal a significant financial blow. (For more on how to determine whether a financial institution is in trouble click here.)

If you think your bank's in hot water — or about to be — start shopping around for other banks. Some smaller and community banks, as well as credit unions are not only going strong they’re looking for good borrowers, says Miller from Sterling National Bank. An added bonus: Credit unions tend to offer more attractive interest rates. And many community banks are typically willing to consider more qualitative factors such as a business owner's character and attitude.

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